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DLA PIPER RUDNICK GRAY CARY US LLP

4365 Executive Drive, Suite 1100

San Diego, California 92121-2133

T     858.638.6717

F     858.677.1401

W     www.dlapiper.com

     July 14, 2005

    YOUR FILE NO. 000-22025

OUR FILE NO. 332396-139747

By Edgar

Mr. Jim B. Rosenberg

Senior Assistant Chief Accountant

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

    Re:

    Aastrom Biosciences, Inc.

    Form 10-K for the fiscal year ended June 30, 2004

    File No. 000-2205

Dear Mr. Rosenberg:

On behalf of Aastrom Biosciences, Inc. (“Aastrom” or the “Company”), we hereby submit the responses
of Aastrom to the staff’s comment letter of April 15, 2003 (the “Comment Letter”). For ease of
review, we have included in italics each of the comments from the Comment Letter followed by
Aastrom’s response to that comment.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, pg.
20.

    1.

    Please refer to the Division of Corporation Finance “Current Issues and Rulemaking Projects
Quarterly Update” under section VIII — Industry Specific Issues — Accounting and Disclosure by
Companies Engaged in Research and Development Activities. You can find it at the following
website address:
http://www.sec.gov/divisions/corpfin/cfcrq032001.htm#secviii

Please disclose the following information for each of your major research and development projects:

    a.

    The current status of the project;

    b.

    The costs incurred during each period presented and to date on the project;

    c.

    The nature, timing and estimated costs of the efforts necessary to complete the project;

    d.

    The anticipated completion dates;

    e.

    The risks and uncertainties associated with completing development on schedule, and the
consequences to operations, financial position and liquidity if the project is not completed
timely; and finally

    f.

    The period in which material net cash inflows from significant projects are expected to
commence.

      Regarding b., if you do not maintain any research and
development costs by project,

Serving clients globally

July 14, 2005

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disclose that fact and explain why management does not maintain and evaluate research and
development costs by project. Provide other quantitative or qualitative disclosure that
indicates the amount of the company’s resources being used on the project.

Regarding c. and d., disclose the amount or range of estimated costs and timing to complete the
phase in process and each future phase. To the extent that information is not estimable,
disclose those facts and circumstances indicating the uncertainties that preclude you from
making a reasonable estimate.

Response:

Aastrom only has one major research and development project, with many initiatives focused on
clinical trials and manufacturing process improvements. Aastrom’s only major ongoing research
and development project is focused on the development of bone-marrow derived stem and progenitor
cells — Tissue Repair Cells (TRCs) — for use in orthopedic indications (bone grafting, spine
fusion, and jaw bone reconstruction) and for use in vascular system regeneration. Clinical
trials are underway in both the United States and the European Union to demonstrate bone
formation in patients with large bone fractures, and clinical trials are underway in the
European Union to demonstrate jaw bone reconstruction. Aastrom is developing clinical protocols
for spine fusions and for treating limb ischemia resulting from peripheral vascular disease.
All of these potential product applications use TRCs created by Aastrom’s proprietary process
and device technologies. Aastrom is also developing new variations of TRCs that are intended to
improve the functionality of these cells for certain clinical indications, to improve storage
and shelf life, or to decrease the cost of manufacturing the TRC products. Aastrom is also
exploring the capability of TRCs to generate different types of human tissues, such as bone,
vascular, cartilage and cardiac tissues.

Since Aastrom has twice changed its focus in response to evolving regulatory requirements and
market conditions (see the discussion under the heading “Clinical Development — Previous
Activities” in Part I, Item 1 of Aastrom’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2004), it would be highly speculative and subjective to estimate the timing or costs to
complete this project. Similarly, since Aastrom’s products are pioneering a market with
changing regulatory requirements and without established reimbursement guidelines, it would also
be highly speculative and subjective to predict the commencement of material net cash inflows.
Aastrom has addressed these risks in its existing filings, and the proposed addition for future
filings identifies where the more significant risks in this area are discussed.

In future periodic filings, Aastrom will add disclosure in the Management’s Discussion and
Analysis section similar to that contained in Exhibit A attached hereto (with updates as
necessary to reflect appropriate changes). Considering Aastrom’s recent June 30 fiscal year
end, Aastrom will add this disclosure in the Form 10-K for the fiscal year ending June 30,

July 14, 2005

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2005 and will update it in subsequent reports on Form 10-Q and 10-K (with a 10-Q report only
containing fiscal year to date data for the interim periods presented). Since most of the
disclosure to be added to the Management’s Discussion and Analysis section is contained in other
sections of the previous 10-K and since the Management’s Discussion and Analysis discussion in
the last 10-K relates to the Company’s financial condition and operating results as of a date
and for periods ending over a year ago, we respectfully submit that adding this additional
language to an old 10-K would be of little value when compared to the benefit obtained from
current disclosure in the upcoming 10-K (which will be filed in approximately eight weeks).

Critical Accounting Policies, page 21.

    2.

    We acknowledge your systematic approach to determine your reserves for obsolete and excess
inventory. Please tell us how this complies to GAAP, specifically Chapter 4 of ARB 43.

Response:

During the applicable periods, the Company had finished goods inventories consisting of AastromReplicell Systems (equipment
used to produce cells) and Cell Cassettes and Base Medium (disposable items used in the
production of cells). As of June 30, 2003 and 2004, the Company’s inventories consisted of the
following:

    June 30, 2003

    June 30, 2004

                AastromReplicell Systems, net (1)

    $
    390,000

    $
    162,000

    Cell Cassettes and Base Medium

    $
    416,000

    $
    227,000

    Total Inventory

    $
    806,000

    $
    389,000

    (1)

    Included in AastromReplicell Systems inventories were $86,000 and $162,000
related to systems under evaluation by potential customers at June 30, 2003 and 2004,
respectively.

Until late in fiscal year 2004, the Company’s business strategy was to sell AastromReplicell
Systems (“ARS”), a combination of equipment components that would allow the operator of the
system to produce cells for the treatment of various conditions. Under this business model, it
was the Company’s plan to sell ARS to its customers and to continue to supply peripheral
elements (i.e. Cell Cassettes and Base Medium used in the production of cells) of the cell
production process to these customers who would independently produce their own doses of cells.
During fiscal year 2004, the Company altered its strategy, in response to changing regulatory
requirements and perceived markets, such that the Company’s current focus is to establish
Company-owned cell production sites and to produce cells on behalf of its customers. The
Company continues to sell Cell Cassettes and Base Medium to existing customers of the ARS.

July 14, 2005

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The Company periodically evaluates the carrying value of its Cell Cassettes and Base Medium
inventories in order to carry such inventories at the lower of their purchase cost or market
value. Specifically, the Company considers projected sales of these inventories compared to
quantities on hand and the label expiration dates. Whenever quantities on hand exceed expected
sales volumes, or the timing of expected sales indicates that inventories will not be sold
before the end of their shelf lives, the Company records a write-off of the carrying value of
such inventories.

The “systematic approach” to determining excess and obsolete inventory referred to in the
Company’s accounting policy relates to the ARS inventories. The net carrying value of ARS
inventories at June 30, 2004 consisted of three systems under evaluation by potential customers,
all of which the Company believed carried a high probability of being purchased by the
respective customers. During the third quarter of fiscal year 2005 one of these systems was
sold and the other two systems were returned. The remaining carrying value of the returned
systems was written down to zero. Accordingly, as of March 31, 2005, the Company had no
remaining ARS inventory balance. In fact, since the end of the first
quarter of fiscal 2004 (September 30, 2003),
the Company’s inventory balance contained no value attributable to ARS inventories, other than
those units under evaluation by potential customers. In addition, as a result of the change in
strategy to focus on hosted cell production sites, any future ARS systems purchased by the
Company will be classified as fixed assets.

As more fully described below, the Company believes that its accounting policy complies with ARB
43, Chapter 4, and is appropriate in the Company’s circumstances involving the design,
development and marketing of novel technologies in new markets.

Prior to fiscal year 2002, the Company evaluated the carrying value of its ARS inventories based
upon the estimated sales volumes and selling prices of the ARS. During 1998 the Company
purchased its first significant volume of ARS inventories in anticipation of significant
projected sales. The Company’s lower of cost or market analysis of the ARS inventories resulted
in no identified write-downs because the Company’s sales projections continued to indicate that
the ARS would be sold at prices that would generate positive margins. However, in light of the
evolving potential markets for the associated cell therapies and regulatory changes and
challenges, the Company had significant difficulty marketing the systems as a stand alone
product. In the second quarter of fiscal year 2000, management concluded that it would not be
able to successfully sell its remaining ARS inventories, in part due to a change in strategy
which involved eliminating its European sales effort. Accordingly, the Company recorded a
$1,027,000 charge to cost of goods sold, to reduce the carrying value of the ARS inventories to
zero.

During the third quarter of fiscal year 2002, the Company began to receive newly-purchased ARS
inventories in preparation for a new US and European launch of the ARS product with new target
markets for its new cell therapies. The Company recorded the ARS inventories at

July 14, 2005

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their purchase cost based upon the Company’s expectation of generating profitable sales to
identified potential customers.

By the end of fiscal year 2002, the Company’s ARS inventory balance was approximately $772,000.
Despite the focus on a new set of cell therapies, the Company again experienced difficulties in
selling the ARS as a stand alone product. The Company’s three-year projection of ARS sales in
the US and Europe indicated that 46 units would be sold between 2003 and 2005. Actual sales in
this period were 3 units (6 units have been sold since the Company’s inception). Although
management believed that the Company would have greater success selling ARS with the focus on a
new and different set of cell therapies, management’s awareness of the past experience of
failing to meet sales forecasts and the large inventory write-off in 2000, led them to seek a
reserve methodology that was not as dependent on estimates of future sales (which management had
concluded contained a high degree of imprecision given the Company’s limited track record and
novel technologies), but, rather, would be based on the absence of sales and the passage of time
(both of which are objectively determinable). Based on the available information as to the
Company’s sales results and the difficulty in developing reliable sales forecasts, management
considered the passage of time without sales to be the best available predictor of the decline
in inventory value.

In developing the reserve methodology based on absence of sales and passage of time, management
considered the Company’s historical experience that had culminated in the second quarter of 2000
write off of all ARS inventories originally purchased during 1998. This historical information
provided evidence that the probability of achieving forecast sales of any single ARS from the
aggregate pool of all ARS inventories declined as time passed without successful penetration of
the market. Specifically, this information indicated that the likelihood of selling any
individual ARS item within the aggregate pool began to decline if meaningful sales success was
not achieved within 12 months of the date the inventories were purchased. Furthermore, this
historical experience and management’s awareness of the technological and regulatory challenges
of the market led management to estimate that the probability of selling any single ARS held for
12 months, declined significantly over the next six months such that the estimated likelihood of
sale of an ARS 18 months after the initial purchase was zero. In spite of the evidence
indicating that probability of sale declined over time, the Company’s historical sales
experience and market intelligence indicated that the ARS inventories did not suffer an
obsolescence-based diminution in value. In fact, for those ARS that the Company has sold
throughout its history, regardless of the period of time on hand before sale, the selling price
was always in excess of the original purchase cost of the inventories. Instead, management
concluded that the market value of its aggregate ARS inventories declined over time based on
market factors such as customer adoption of the technology and regulatory challenges faced by
customers in gaining approval for the production of cells. That is, a customer’s buying
decision was significantly affected by factors other than the price of the Company’s products.

July 14, 2005

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ARB 43, Chapter 4, Statement 7, indicates that the lower-of-cost or market rule may properly be
applied either directly to each item or to the total of the inventory. As described above,
because the probability-weighted selling price is inversely correlated with the passage of time,
the “market” value of the inventory estimated by management for use in the LCM calculation
declined as further time passed without a sale of an ARS system. Accordingly, in the fourth
quarter of fiscal year 2002, the Company adopted an inventory valuation policy designed to
reduce the aggregate carrying value of its ARS inventories based on the declining probability of
commercial success in selling the ARS inventories as time passed. Management believes that
its approach to reducing the carrying value of ARS inventories is consistent with ARB 43 Chapter
4, Statements 5, 6 and 7 as it provides a reasonable basis to estimate the decrease in utility
of the aggregate ARS inventories below their cost. In light of the novel nature of the
Company’s ARS products and the developing nature of the market for those products, estimating
the selling price of any individual ARS was virtually impossible. I